Regulatory Intervention in Card Payment Systems: An Analysis of Regulatory Goals and Impact

This paper assesses the extent to which regulatory intervention targeting interchange fees has been consistent with the economic theory of two-sided markets and examines the available evidence on the impact of these regulations. The last two decades have seen a drive to regulate the interchange fees of open payment card systems that was primarily motivated by merchants’ complaints. Although pursuing the same objective of decreasing interchange fees, the theoretical and legal basis for interventions were diverse and often based on questionable premises. Economic research on two sided markets has shown that prices in such markets serve to distribute the costs and benefits of the system among the different types of users in a way that maximizes their voluntary participation. Prices to the different types of users are not mainly determined by costs but by the value that these users indirectly bring to the system, contributing to its attractiveness for other users. Regulatory interventions were mostly founded on a partial analysis of payment card systems and their impact was riddled with unintended consequences. Besides a transfer of rent from consumers and issuing banks to mostly large merchants, there is no empirical evidence that any other policy objectives in the form of overall efficiency or consumer welfare was achieved. Two decades of regulatory intervention in payment card systems provide sufficient evidence to call for much caution for further intervention in an increasingly dynamic and fast changing market.